News analysis: Clinton balances the budget, divides the Republicans

CBS.MarketWatch.com

WASHINGTON (CBS.MW) -- President Clinton has Republicans fuming again. No, it's not his sex life that has the conservatives in a lather. It's his budget. Specifically, his balanced budget.

Once again, Clinton has stolen the Republicans' best weapon and used it against them.

Clinton announced Monday that he would propose a $1.73 trillion federal budget for the fiscal 1999, which begins Oct. 1. His budget plan forecasts a $9.5 billion surplus for the year, the first black ink since 1969. And he said the trend is for "surpluses as far as the eye can see."

``This budget marks the end of an era, an end to decades of deficits that have shackled our economy, paralyzed our politics and held our people back,'' Clinton said. "This budget marks the end of an era, an end to decades of deficits that have shackled our economy, paralyzed our politics and held our people back.''

President Clinton Clinton's budget is just the opening salvo in the budget battle. Republican leaders like Reps. John Kasich of Ohio, and Bill Archer of Texas, and Sens. Pete Domenici of New Mexico and William Roth of Delaware, will have plenty of input between now and any signing ceremony in the Rose Garden.

Although Congress is controlled by Republicans, Clinton has used the power of the veto and the public's support to win many concessions in past budget battles. Despite the sex scandal, Clinton is enjoying overwhelming approval for his policies. Further compromise is likely this year.

Big government?

In their public howls of protest, the Republicans say Clinton is breaking the deal they made last year to keep government spending down. Republicans say Clinton is trying to return the nation to the era of big government.

``We can't go back to the days of skyrocketing government spending. But that's exactly what the president has proposed, with $90 billion in new taxes and $100 billion in new social spending,'' said House Republican Leader Dick Armey of Texas.

``For President Clinton, the budget surplus is the road back to the era of big government,'' Armey said.

Clinton's proposed programs for child care, education, health care and the environment might not shatter the budget deal. They amount to about 1 percent of federal spending. And Clinton has promised to find offsets elsewhere in the budget to pay for them, even if the $65 billion in new tobacco taxes is stalled.

Clinton's budget calls for $105.6 billion in tax increases and user fees over five years, chiefly on tobacco and corporations. It calls for $24.2 billion in tax cuts, including increased child care tax credits for working families.

Tobacco revenue``For President Clinton, the budget surplus is the road back to the era of big government.''

Rep. Dick Armey The money from the tobacco settlement "ought to go to Medicare to preserve it for our children," said Sen. Phil Gramm, R-Texas.

Even before Clinton earmarked some of the proceeds, the landmark $368 billion national tobacco settlement was in big trouble on Capitol Hill, Democrats and Republicans agree. Clinton may have a big incentive to get the settlement through, now that he's committed the money.

Despite their protest, Republicans are burdened with a winners' curse on fiscal policy. The fact is, the federal government has been shrinking ever since the Cold War ended. Government spending adjusted for inflation has fallen for seven years in a row. Federal government spending in 1999 will be at its lowest level as a percentage of the economy since 1974.

By embracing fiscal conservatism, Clinton takes away one of the Republican Party's favorite issues. As long as the government ran a huge deficit, social conservatives and fiscal conservatives could unite in their crusade against big government. And now the party appears ready to crack along another fault line: Many of the deficit hawks in the party favor a moderate role for government as long as it doesn't live beyond its means. Others hate the government and would like to keep shrinking Washington's role until it's just the Pentagon and some civil servant who mails block-grant checks to the states.

Great divide

The debate over what to do with the surplus exposes this divide. Half of the party would like to send every dime of the surplus back to taxpayers. But the other half believes Washington can't afford to give away what could be a temporary surplus with permanent tax cuts. They think the government should start to pay down the $5 trillion debt.

Paying down the debt is the biggest concern for investors right now. John Ryding, senior economist for Bear Stearns, says Washington will probably pay off about $150 billion of debt in the next two years, a fantastic reduction in supply that has already driven the price of bonds higher.

Ryding said investors will have to find other places to park their money, such corporate and municipal bonds and stocks. Investors who demand the safety of Treasuries will pay a premium, Ryding said.

Democrats are also divided over the proper size of government. But their divisions are not fatal, because liberal, free-spending Democrats have been battered nearly into extinction. They are likely to be satisfied with a few crumbs: the increased investments in education and health care.

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